NOTE 23 - FAIR VALUE MEASUREMENTS

12 Months Ended

Dec. 31, 2021

Fair Value Disclosures [Abstract]

NOTE 23 - FAIR VALUE MEASUREMENTS

NOTE 23 - FAIR VALUE MEASUREMENTS

Salisbury uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Securities available-for-sale are recorded at fair value on a recurring basis. Additionally, from time to time, other assets are recorded at fair value on a nonrecurring basis, such as loans held for sale, collateral dependent impaired loans, property acquired through foreclosure or repossession and mortgage servicing rights. These nonrecurring fair value adjustments typically involve the application of lower-of-cost-or-market accounting or write-downs of individual assets.

Salisbury adopted ASC 820-10, “Fair Value Measurement - Overall,” which provides a framework for measuring fair value under generally accepted accounting principles. In accordance with ASC 820-10, Salisbury groups its financial assets and financial liabilities measured at fair value in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. GAAP specifies a hierarchy of valuation techniques based on whether the types of valuation information (“inputs”) are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect Salisbury’s market assumptions. These two types of inputs have created the following fair value hierarchy:

Level 1. Quoted prices in active markets for identical assets. Valuations for assets and liabilities traded in active exchange markets, such as the New York Stock Exchange. Level 1 may also include U.S. Treasury, other U.S. Government and agency mortgage-backed securities that are traded by dealers or brokers in active markets. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.

Level 2. Significant other observable inputs. Valuations for assets and liabilities traded in less active dealer or broker markets. Valuations are obtained from third party pricing services for identical or comparable assets or liabilities. Currently, Salisbury uses an interest rate swap to manage its interest rate risk. The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of ASC 820, Salisbury incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Bank has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Level 3. Significant unobservable inputs. Valuations for assets and liabilities that are derived from other methodologies, including option pricing models, discounted cash flow models and similar techniques, are not based on market exchange, dealer, or broker traded transactions. Level 3 valuations incorporate certain assumptions and projections in determining the fair value assigned to such assets and liabilities.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. Salisbury did not have any significant transfers of assets between levels 1 and 2 of the fair value hierarchy during the twelve-month period ended December 31, 2021.

The following is a description of valuation methodologies for assets recorded at fair value, including the general classification of such assets and liabilities pursuant to the valuation hierarchy.

• Securities available-for-sale and the CRA mutual fund. Securities available-for-sale and the CRA mutual fund are recorded at fair value on a recurring basis. Level 1 securities include exchange-traded equity securities. Level 2 securities include debt securities with quoted prices, which are traded less frequently than exchange-traded instruments, whose value is determined using matrix pricing with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. This category generally includes obligations of the U.S. Treasury and U.S. government-sponsored enterprises, mortgage-backed securities, collateralized mortgage obligations, municipal bonds, SBA bonds, corporate bonds and certain preferred equities. Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

• Derivative financial instruments. The fair value of the interest rate swap is determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves.

• Collateral dependent loans that are deemed to be impaired are valued based upon the fair value of the underlying collateral less costs to sell. Such collateral primarily consists of real estate and, to a lesser extent, other business assets. Management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values resulting from its knowledge of the property. Internal valuations are utilized to determine the fair value of other business assets. Collateral dependent impaired loans are categorized as Level 3.

• Other real estate owned acquired through foreclosure or repossession is adjusted to fair value less costs to sell upon transfer out of loans. Subsequently, it is carried at the lower of carrying value or fair value less costs to sell. Fair value is generally based upon independent market prices or appraised values of the collateral. Management adjusts appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of the property, and such property is categorized as Level 3.

• Assets held for sale. The fair value of assets held for sale is based on independent market prices, appraised values or the contractual selling price.

Assets measured at fair value are as follows:

	Fair Value Measurements Using						Assets at
(in thousands)		Level 1		Level 2		Level 3		fair value
December 31, 2021
Assets at fair value on a recurring basis
U.S. Treasury	$	—	$	15,131	$	—	$	15,131
U.S. Government Agency notes		—		31,604		—		31,604
Municipal bonds		—		47,822		—		47,822
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		74,541		—		74,541
Collateralized mortgage obligations:
U.S. Government agencies		—		20,898		—		20,898
Corporate bonds		—		12,400		—		12,400
Securities available-for-sale	$	—	$	202,396	$	—	$	202,396
CRA mutual fund		901		—		—		901
Derivative financial instruments		—		18		—		18
Assets at fair value on a non-recurring basis
Assets held for sale 1	$	700	$	—	$	—	$	700

December 31, 2020
Assets at fair value on a recurring basis
U.S. Government Agency notes	$	—	$	7,851	$	—	$	7,851
Municipal bonds		—		27,617		—		27,617
Mortgage-backed securities:
U.S. Government agencies and U.S. Government-sponsored enterprises		—		36,573		—		36,573
Collateralized mortgage obligations:
U.S. Government agencies		—		17,454		—		17,454
Corporate bonds		—		8,916		—		8,916
Securities available-for-sale	$	—	$	98,411	$	—	$	98,411
CRA mutual funds		917		—		—		917
Derivative financial instruments		—		4		—		4

¹ Prior to December 31, 2021, the Bank entered into an agreement with a third party to sell the building that houses its Poughkeepsie, New York retail branch and relocate the branch to leased space nearby. This sale was completed in January 2022. At December 30, 2020, Salisbury did not have any assets measured at fair value on a non-recurring basis.

Carrying values and estimated fair values of financial instruments are as follows:

		Carrying		Estimated	Fair value measurements using
(In thousands)		value		fair value		Level 1		Level 2		Level 3
December 31, 2021
Financial Assets
Cash and cash equivalents	$	175,335	$	175,335	$	175,335	$	—	$	—
Interest bearing time deposits with financial institutions		750		750		750		—		—
Securities available-for-sale		202,396		202,396		—		202,396		—
CRA mutual fund		901		901		901		—		—
Federal Home Loan Bank of Boston stock		1,397		1,397		—		1,397		—
Loans held-for-sale		2,684		2,721		—		—		2,721
Loans receivable, net		1,066,750		1,066,733		—		—		1,066,733
Accrued interest receivable		6,260		6,260		—		6,260		—
Cash surrender value of life insurance policies		27,738		27,738		—		27,738		—
Derivative financial instruments		18		18		—		18		—
Financial Liabilities
Demand (non-interest-bearing)	$	416,073	$	416,073	$	—	$	416,073	$	—
Demand (interest-bearing)		233,600		233,600		—		233,600		—
Money market		330,436		330,436		—		330,436		—
Savings and other		237,075		237,075		—		237,075		—
Certificates of deposit		119,009		119,716		—		119,716		—
Deposits		1,336,193		1,336,900		—		1,336,900		—
Repurchase agreements		11,430		11,430		—		11,430		—
FHLBB advances		7,656		7,714		—		7,714		—
Subordinated debt		24,474		24,409		—		24,409		—
Note payable		170		171		—		171		—
Finance lease liability		4,107		4,223		—		—		4,223
Accrued interest payable		49		49		—		49		—

December 31, 2020
Financial Assets
Cash and cash equivalents	$	93,162	$	93,162	$	93,162	$	—	$	—
Interest bearing time deposits with financial institutions		750		750		750		—		—
Securities available-for-sale		98,411		98,411		—		98,411		—
CRA mutual fund		917		917		917		—		—
Federal Home Loan Bank of Boston stock		1,713		1,713		—		1,713		—
Loans held-for-sale		2,735		2,790		—		—		2,790
Loans receivable, net		1,027,738		1,057,606		—		—		1,057,606
Accrued interest receivable		6,373		6,373		—		6,373		—
Cash surrender value of life insurance policies		21,182		21,182		—		21,182		—
Derivative financial instruments		4		4		—		4		—
Financial Liabilities
Demand (non-interest-bearing)	$	310,769	$	310,769	$	—	$	310,769	$	—
Demand (interest-bearing)		218,869		218,869		—		218,869		—
Money market		278,146		278,146		—		278,146		—
Savings and other		189,776		189,776		—		189,776		—
Certificates of deposit		131,514		132,875		—		132,875		—
Deposits		1,129,074		1,130,435		—		1,130,435		—
Repurchase agreements		7,116		7,116		—		7,116		—
FHLBB advances		12,639		12,786		—		12,786		—
Subordinated debt		9,883		10,027		—		10,027		—
Note payable		208		212		—		212		—
Finance lease liability		1,673		1,920		—		—		1,920
Accrued interest payable		43		43		—		43		—

The carrying amounts of financial instruments shown in the above table are included in the consolidated balance sheets under the indicated captions or are included in other assets and other liabilities. In 2021, Salisbury issued new subordinated debt and paid off its previously issued subordinated debt in its entirety. Salisbury categorized its new subordinated debt within level 2 of the fair value hierarchy.